Real Estate Investors: Is Your Financing in Order?
If you are investing in real estate, you will want to make sure your finances are in order before you start making offers on properties. One of the biggest mistakes we see inexperienced investors make is getting too far ahead of the game. They see a property they like and make an offer without really having a solid plan, budget or financing solution in place.
You should have a business plan that outlines your investment strategy, profit goals and general budget. Then, you’ll want to perform project-specific budgeting and property analytics before making any offers. You have to make sure the property is worth your investment of time and money before committing to purchase it.
When it does time to purchase an investment property that meets your standards, you have to be ready with the financing. Getting your finances in order long before you start your property search is vital. This is not something you should wait and figure out later. Investment real estate is an extremely competitive market. If you don’t have solid financing, you simply won’t be able to get the houses that you want to buy. Here are some financing solutions to consider:
In real estate, cash is king. If you have access to cash resources—enough to pay for a house and its renovations—you are going to be in great shape as a real estate investor. Plus, you won’t have to worry about loan or interest payments that will eat into your profits.
Private Individual Lender
Private individual lenders operate outside of traditional financial institutions. They lend money to investors they believe will be successful. They often have higher interest rates than banks, or they can potentially request a part of the real estate deal in exchange for the loan. Be sure and understand what you are getting into with a private loan.
Private lenders may also offer what is known as a “hard-money” loan. It relies on a hard asset—generally the property being purchased. It is a type of bridge loan that offers a short-term financing solution until the house is sold or traditional funding can be secured. Again, interest rates can be very high with this type of private loan and they can have strict deadlines for completing renovations.
Traditional bank financing could be a solution for you. Interest rates will be lower than with private lenders, but higher for investment properties compared to what you can typically expect with primary residences. Understand a traditional loan will require monthly mortgage payments that may eat into your renovation or operating expenses, especially if it’s a rental property. If you are doing a fix and flip investment, you will want to make sure the load doesn’t have any prepayment penalties as you should pay off the balance as soon as you close on the sale.
Personal Loans/Investor Pools
You can ask friends and family for loans or start up an investment pool where multiple investors are contributing funds and have a piece of the deal. There may be investment groups you can join or reach out to, as well. These deals can get more complex with more people involved, but it may be a way for you to build up capital without owing money to banks or private lenders.
Other Financing Solutions
There are a number of other creative financing solutions that real estate investors can explore. These include owner-financed, lease-to-own financing, rent-to-own financing, lease purchases and subject-to financing. You may be work out custom deals with the property sellers that create win-win situations for both parties.
The important thing to remember if you are a real estate investor is that you need to have your financing in order. It should be a central part of your business plan and will help shape your project budgets. Your offers will also be more attractive to home sellers if you have solid financial footing.
To learn more about investing in real estate, consider joining the PropertyLark home buying network. We can connect you with the resources and information you need to be a more successful real estate investor.